My Customers Are Living Too Long, and It’s Costing Me Money
When to cut ties and move on (even from paying customers)
A customer’s lifetime, lifetime value, and sales conversion window are three different (but related) things.
- Lifetime: The duration over which they (continue to) purchase from your company — be that one week, three months, two years, etc.
- Lifetime value: The amount of money you make from them over that period, based on the revenue and profit from their average purchase and the frequency of those purchases over that aforementioned lifetime duration.
- Sales conversion window: How long it takes from the moment a lead (potential future customer) comes into contact with your brand or sales funnel to their eventual first purchase.
When is it too early to kill off your customers?
Here’s a perplexing scenario that I’ve encountered intermittently over the past few years in business, and it always throws me for a bit of a loop.
A customer makes a purchase for $1997.
Their initial lead cost was between $0.07 and $0.10. (for this particular type of funnel — it can vary up to $40+, depending on the acquisition channel and marketing method employed, i.e. paid ads, webinar funnel, referral, etc.)
Either way, most people can do the math and figure out that the $1997 sale was most likely a profitable one.
But here’s the monkeywrench coming in from stage left: They had been on our lead list since January of last year. So more than a year (assume I’m writing this in February or beyond of the following year).
What does that mean? Two things:
- I had been paying to keep them in our funnel and continue to remarket to them for over a year.
- Seemingly “dead” or “stale” leads may one day come back to life…but is it worth it?
And this is the hard part. Every time I talk with my team about cutting out the “dead” or “stale” leads (who’ve never actively engaged with any of our marketing since opting in, or at least never in the past three or six months), something like this happens. And it confuses me to no end.
It’s like the guy you date for ten years who never mentions marriage. Just when you’re about to break up with him, he catches you off guard and pulls out a ring, with no warning whatsoever. He may have blown off every engagement- and marriage-related hint you’ve not-so-subtly thrown his way on a weekly or monthly basis. But today, he’s changing his tune.
This is the most frustrating, perplexing situation, and there is no one right answer. Some girls would have long-since left him, just as some entrepreneurs and marketers would have long-since cut their losses and dropped those “dead” leads after three months of silence or unopened emails.
But then they miss out on those unexpected gems. The $0.07-lead-turned-$1997 sale. How can you spit in the face of that ROI?
There’s actually a very simple way:
The truth about leads is that when they become a burden, sucking away valuable marketing resources from other potential fresh leads (who might actually convert to a sale sometime sooner than 365+ days…), keeping them in the marketing rotation might not be worth it.
Every person on your list has a potential value…and the more time they spend on that list, inactive, their value wanes. Even if they will purchase three years from now, a dollar today (or $1997 today) is worth more than a dollar (or $1997) in three years. This is due to a simple finance principle called the “Time Value of Money”.
The rationale here is that you could be investing that dollar earned today, so by the time tomorrow or three years from now rolls around, it could actually be worth a lot more. In comparison, your marketing efforts to that same person are a drain on your expenses, with no current return, and you could make the case (by the present versus future value of money principle) that the longer it takes them to convert (purchase), the more diminishing those returns become.
But at the same time, it’s hard to convince yourself to let go of hard-earned leads, especially ones that cost you significant marketing money and time to acquire. At what point do you cut your losses…if ever?
I’ve formulated a little equation to help determine if and when to let those “stale” leads go live their merry life of non-purchasing on someone else’s lead list. Here goes:
- Y = the buffer you want to maintain. This buffer is the profit margin between the price of your product (revenue expected from the customer) and your cost to acquire that lead and convert them to a sale.
- Also, CAC stands for “customer acquisition cost”, or how much the initial lead cost you to acquire.
If ((CAC + (Retargeting Cost x # Months Retargeting)) = (Expected Customer Lifetime Value — Y)), drop those tire-kickers like the rotten hot potatoes they are.
If ((CAC + (Retargeting Cost x # Months Retargeting)) < (Expected Customer Lifetime Value — Y)), keep them on the lead list.
In my case, that equation would look something like this, assuming I spend $50 per month retargeting that one customer and my chosen Y is $1000, so I want a $1000 profit margin buffer over marketing costs:
If (($0.07 + ($50 x 12 month)) < ($1997– $1000)), keep the customer on the list.
$0.07 + ($600) = $600.07
$600.07 < $997, so I should keep them on the list.
However, if I keep Y at $1000 and assume I spend $50/month retargeting that same customer, I can also figure out exactly how many months I have before they deserve the boot.
($997 — ($0.07)) / $50 = the number of months I can keep them on my list before I break my own rule and start eating into my required $1000 after-marketing profit. In this case, that number equals 19.93 months. In other words, if all else remains the same, I can keep them on my lead list for more than a year and a half, and it’s “no skin off my back” as they say.
But maybe you’re allergic to math:
While this formula is a good way to draw your own line in the metaphorical marketing sand and decide when enough is enough, there is one other option.
You can ask them point-blank. How do you do that?
Simple: A breakup sequence or a deadline — and mean it.
This isn’t the time for communication niceties or small, friendly reminders and minor urges. This is “burn the ships” time. This person’s going to break up with you or you’ll do it for them.
A breakup sequence is just what it sounds like. With one exception: don’t get fancy. Don’t get salesy. Don’t over-link or add one “!” in there. This is the one email that cannot land in their junk folder. This is the one email to which they actually need to reply, and fast. You can ask them a basic “Yes” or “No” question, but make it clear that no reply means sayonara, baby. Off with your head…or your name on the list or in our retargeting group…same concept.
This is the breakup sequence I’ve never been bold enough to write, but I think one day I just might. For now, I’m more of a formula kind of girl…and I’m always reassured to return to the formula when one of those year-old leads makes a large purchase.
But what if they were just one interaction away from purchasing?
But what if they weren’t? What if they had no intent to spend a dime with you, but liked your ads or enjoyed your engaging email copy? You’ll never know what your customer is thinking or planning entirely…and it probably isn’t worth your time to guess.
Whether you go for the formula method, the breakup sequence, or the hard cut-off deadline of dropping everyone who hasn’t engaged since a certain date, the most important thing here is to be aware.
None of us should market blindly. None of us should spend money blindly. And none of us should feel that our customer lifetime value — or the acceptable conversion window for those customers — is a mystery. If you only sell one $20 product, you probably don’t want to spend $15 acquiring leads and another $5 per month retargeting each lead.
Own your numbers or they’ll own you. That’s just my $1997.02 :)
And remember, it’s not personal; it’s just math. I don’t really want to kill off stale leads…but perhaps my equation indicates they were already dead in the first place. Would you pay to market to corpses? Nah, I wouldn’t either.